What does the VAT increase mean for you?

The most significant and imminent impact of the 2018/19 Budget on small businesses such as franchises was the announcement of a one percentage point increase in value-added tax (VAT) from 1 April. For many businesses 1% may not seem a significant increase, but it is to any franchise focused on lower income consumers. Nonetheless, all franchises are likely to see higher inflation in their inputs – given the experience in the UK when it increase the rate of VAT. Many businesses took the opportunity to increase their prices above the rate of the increase in VAT.

Negative knock-on effect on small businesses

The VAT increase to 15% will eat away at consumers’ disposable income and those who only just make ends meet each month will out of necessity cut back on some of the luxuries they currently enjoy, especially fast food and entertainment. Even middle class families, to balance their budgets may cut back on occasional nights out, visits to a coffee bar or hairdresser. Small businesses in sensitive niches will have the choice of whether to pass on the increase to customers through price increases, or absorb the cost themselves by cutting back costs. They could also implement a mixture of the two.

Government acknowledges small business

One pleasing aspect of the 2018/19 Budget was that then finance minister Malusi Gigaba acknowledged the vital role that small business and entrepreneurs play in the development of the economy. In both the SONA and budget speech, government’s commitment to driving economic growth through small businesses cements the vital role of small businesses such as franchises as the growth engine of the South African economy. For the longer term, that is reassuring.

Systems need updating

Business systems would have to be adjusted to deal with the change – at a cost to those businesses in some instances. It is important that all businesses adjust their accounting systems prior to 1 April to ensure they are compliant with the new VAT rate. Cash flow is critical to any business and it’s vital to consider its effect on a business’ ability to pay its own debts as well as pay for essential products and services, which will now incur unbudgeted price increases.

Don’t forget budgeting

Franchises will have to adjust their budget process to allow for:

unplanned price increases in operational expenditure, including fuel levies which are set to increase in April as well possible decrease in budgeted spend by its customers

It is crucial for franchisees to pay close (or closer) attention to their monthly cash flow statements in order to remain on top of the business’ finances.

How to counter the increase

The impact of the VAT increase will undoubtedly harm small businesses, though the extent will vary on which market segment a particular business operates in. In a low income market segment a business might suffer more than in a higher income market segment. It also depends on whether the business is selling a necessity or a luxury.

There are a few steps franchisees and franchisors can take to counter potential negative impacts of the VAT increase. These include:

offering early account settlement discounts to debtors

regularly reviewing cash flow statements

look at every expense for cheaper options (insurance, data costs, and have an expert check your bank statements to see if your bank is over charging you on interest and fees)

keeping cash flow statements as realistic as possible

making adjustments for periods of downturns as a result of negative economic factors.

There’s some good in the Budget!

A number of projects announced in the Budget speech may signify positive future developments for franchises:

The Public Procurement Bill which is due to be submitted for public comment shortly, indicates government is committed to supporting small businesses through initiatives such as the CEO Initiative

a Jobs Summit

a Youth Employment Service initiative

the promise to set aside 30% of all public procurement for SMEs

The finance minister is expected to instruct government departments and public institutions to henceforth pay suppliers within 30 days

There was also clarification around a R2,1 billion fund being developed by the Departments of Small Businesses and Science & Technology and the National Treasury to benefit SMEs during their early start-up phase, although this will not have an immediate impact, as funding distribution is only set for the beginning of the 2019/2020 financial year.